Partial Adjustment As Optimal Response in a Dynamic Brainard Model

Richard Startz

No UWEC-2003-20, Working Papers from University of Washington, Department of Economics

Abstract: Uncertainty about the precise quantitative effect of policy is endemic in economics. In a classic paper, Brainard showed that in the face of multiplier uncertainty in a static model that optimal policy is relatively conservative. I extend this work to a dynamic model and show in general that gradual adjustment is optimal and in the most simple case derive the classic partial adjustment model as the optimal response to shocks.

Date: 2003-10
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